Egypt’s military removed Morsi from power yesterday, suspended the constitution and announced an early presidential election in a bid to resolve the nation’s political crisis.

A technocratic government will be formed and the head of the Supreme Constitutional Court will be in charge of running the country’s affairs, Defence Minister Abdelfatah al-Seesi said in a televised broadcast.

With growth already the weakest in two decades, unemployment stands at a record 13.2%. The mounting risk is of a vicious circle in which the street clashes that left at least 18 dead within one day alone and a political vacuum drive the economy deeper into a slump during the transition period.
That threatens foreign investment, tourism and the chances of an International Monetary Fund (IMF) aid package.

“We don’t want to see a power vacuum going on for a long time,” said Rami Sidani, a Dubai-based money manager at Schroder Investment Management, which holds Egyptian stocks. “Despite the celebrations, it remains a coup led by the military, which puts international support at risk if power is not handed over in a timely manner.” He spoke by phone on Thursday.

Egypt’s benchmark bonds rose from a record low and EFG-Hermes Holding said stocks may gain. The benchmark EGX 30 stock index plunged 12% in June.

Falling Knife?
Investors “want to see what’s going to happen before they come back to the market,” said Samer Mardini, Dubai-based vice president of fixed income at SJS Market. “When the knife is falling no one has the power to catch it.”

A May report by the United Nations said poverty and food insecurity had jumped in Egypt over the past three years. It estimated 17% of the population struggle to secure enough food, up from 14% in 2009. The malnutrition rate has risen to 31% of children under five, up from 23% in 2005.

Unrest isn’t limited to Egypt, the cities of emerging markets from Turkey to Brazil witnessed riots in recent weeks before dying down. Unemployment in Turkey was 10.1% in March, while Brazil’s was 5.8% in May.

It is nevertheless in Egypt where the recent clashes have been the most violent, two years after Morsi came to power following a mass uprising that ousted Hosni Mubarak. The country’s first democratically elected civilian leader took office promising to attract outside investment and reduce unemployment below 7% by 2016.

Losing Jobs
Now more than one million people have lost work since the start of 2010 and of those without work, 80% are under the age of 30 and two out of every five Egyptians continue to live on less than $2 a day.

“There are several drivers of opposition to Morsi at present, but economic woes are the most important,” said Edward Coughlan, head of Middle East and North Africa research at Business Monitor International in London.

“Egypt cannot afford a prolonged crisis, which is why the army is eager to intervene. The army will hope that providing a road map for the country will stabilise the economy and provide security.”

The outlook isn’t bright, the IMF forecasts economic growth of 2% this year, about the slowest since 1992. The lender says the country could end up with the fastest inflation and slowest growth among all the Middle Eastern countries with traded foreign debt. The rating of that debt has been pushed further into junk status by the three main ratings companies since the Arab Spring.

Defecit
The budget deficit is projected by the government to reach 11% to 11.5% of gross domestic product this fiscal year. International reserves have also been sapped by about 60% to $15.2-billion, the lowest since 2004. And tourism, the lifeblood of Egypt’s economy, is plunging.

“As far as business in the hotels is concerned, it is at a standstill,” said Raymond Khalife, adviser to the chairperson of the Semiramis Hotel in Cairo, in a phone interview. “Occupancy is down to rock bottom. The situation is bad, because we’re at a standstill, and we don’t know which way it is going to go, whether a street battle or political settlement.”

The pain may only get worse the longer the discord endures, said William Jackson, an emerging-markets economist at Capital Economics in London.

Tourism in resorts such as Sharm el-Sheikh and Luxor account for about 10% of GDP, while the disquiet will jeopardise a $4.8-billion loan accord with the IMF, he said.

“In the short term things can only get worse, no matter what happens now,” said Elie Podeh, professor of Islamic and middle eastern studies at the Hebrew University of Jerusalem. “There is no one who can come to power who can solve Egypt’s economic problems tomorrow.” – Bloomberg